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80 Cards in this Set

  • Front
  • Back
Two types of instruments:
1. Note
2. Draft
Promise to pay
-two parties: maker and payee
Order to pay
-three parties: drawer, drawee, and payee
Person ordering payment
Person to make the payment
(check context-payor bank)
Person to receive the payment
Meaning of negotiability:
refers to the form of the instrument
-determined at time of issuance
8 Elements of Negotiability:
1. In writing
2. Signed by maker or drawer
3. Unconditional promise to pay
4. Fixed amount
5. In money
6. No other undertaking or instruction
7. Payable on demand or at a definate time
8. Contains words of negotiability
1st Element of Negotiability:
In writing
2nd Element of Negotiability:
Signed by maker or drawer
3rd Element of Negotiability
Unconditional promise or order to pay
4th Element of Negotiability
Fixed Amount
5th Element of Negotiability
In money
6th Element of Negotiability
No other undertaking or instruction
7th Element of Negotiability
Payable on demand or at a definate time
8th Element of Negotiability
Contains words of negotiability
Elements of Negotiability:
In writing
no requirement what it is to be written with or written on
Elements of Negotiability:
Signed by Maker or Drawer
Any symbol executed or adopted by a party with present intent to authenticate a writing
Elements of Negotiability:
Unconditional promise or order to pay
Items that make a promise or order conditional (and thus not negotiable)
1. Express condition to payment
2. Promise or order "subject to" or "governed by" another writing or record
3. Incorporation by reference
Items that do not make a promise or order conditional
1. Statement of consideration
2. Reference to another record/writing ("as per" or "in accordance with")
3. Incorporation by reference of items that would not hurt holder
4. Limitation of payment to a particular fund or source
5. Countersignature
6. Consumer Protection Language (but will prevent a holder from being a HDC)
4th Element of Negotiability:
Fixed Amount
Must be able to look at instrument and determine the principle amount due.
5th Element of Negotiability:
In Money
Cannot be payable in goods or services, authorized medium of exchange.
words vs. figures=words prevail
6th Element of Negotiability:
No other undertaking or instruction
Couriers without luggage
Not a full contract.
7th Element of Negotiability:
Payable on Demand or At a definate time
if the instrument does not state the date it is due, it is a demand instrument.
1st day of fall=ok
when uncle fred dies=not ok
8th Element of Negotiability:
Contains words of negotiability
Bearer language (payable to bearer, payable to the order or bearer, no payee stated, indication that possessor entitled to payment, to cash, to order of cash, not payable to ided person)
Order language (to the order)
both order and bearer language-bearer controls
transfer of negotiable instrument so transferee is a holder
Holder Status
1. Possession of negotiable instrument
2. Good title
Good Title:
Good title by possession
Good Title:
Possession plus necessary endorsements
Special Indorsements
Payee's signature plus designation of new person to whom instrument payable
Creates order paper
Restrictive Indorsements
For deposit or collection
Identification of person to whom insturment payable (the payee)
Intent of issuer determines
Holders in Due Course:
Why do we care?
Better rights than a mere holder, important when the obligor raises a defense to payment
6 Elements of HDC Status
1. Negotiable Instrument
2. Holder
3. Authenticity not apparently questioned
4. Holder must pay value
5. Good Faith
6. Without notice at time of instrument acquisition
1st Element of HDC Status:
Negotiable Instrument
2nd Element of HDC Status:
3rd Element of HDC Status
Authenticity not apparently questioned
4th Element of HDC Status:
Holder must pay value
5th Element of HDC Status:
Without notice at time of instrument acquisition
6th Element of HDC Status:
Good Faith
Holder Status:
Possession of negotiable instrument and
Good title
Authenticity not apparently questioned:
Instrument does not bear such evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call its authenticity into question.
Holder must pay value:
Must pay value for instrument to deserve special protection
Good Faith:
Honesty in fact (subjective)
Ovservance of reasonable Commercial Standards of Fair Dealing
Without Notice at Time of Instrument Acquisition:
ACTUAL NOTICE-subjective test +reason to know?
Later notice doesn't matter, once you get HDC status, it cannot be taken away.
Shelter Rule:
Transferee has rights of transferor, doesn't make you a HDC, just have the rights
Burdon of proof on person claiming HDC status
Real Defenses:
Infancy, Duress which voids obligation, lack of legal capacity making obligation void, illegality making obligation void, Fraud in the execution, Discharge in insolvency, omission of required consumer protection language, SOL, alteration, unauthorized signatures and forgeries
HDC protected from:
Personal Defenses
HDC not protected from:
Real Defenses
Personal Defenses:
Failure of consideration, breach of warranty, fraud in the inducement, payment
Basis of contract liability:
the person's signature
Agent escapes personal liability if:
1. principal identifies in instrument
2. Signature unambiguously shows it made on behalf of the principal
Agent liable to a HDC (if first two elements not satisfied):
Liable unless agent can prove that the agent had NOTICE of the representative nature of agent's signature
Agent liable to a non-HDC (if first two elements not satisfied):
Liable unless agent can prove that the original parties did not intend the agent to be liable.
Special agency rule for checks
Agent for drawer not personally liable if principal's name is on check (even if agent did not indicate agency capacity)
If agent not authorized:
Then it is a forgery, alleged agent is bound.
Indorser of note or draft-Liability disclaimer allowed?
Yes, so indorse your check, without recourse, Billy Lowry
Indorser order of liability:
Sue prior indorsers for payment, liable to later indorsers
Indorser liability discharged:
after 30 days
Bank may pay postdated check unless customer:
Gives bank a notice of the postdating which describes the check with reasonable certainty.
Stop payment orders must be in:
Writing! Oral stop payment orders are unenforceable in Texas! But bank could be nice and stop payment anyway.
Requirements for a stop payment order writing:
1. Dated
2. Signed
3. Describe item with certainty (account #, check #, amount)
How long are stop payment orders valid?
6 months, can be renewed
Bank's defenses if it pays over a stop payment order:
Stop payment order didn't comply with requirements, no loss-customer would have to pay the check even if payment were stopped
Wrongful dishonor:
Drawee (bank) dishonoring a properly payable check
Damages for wrongful dishonor:
The drawer may recover all damages caused by the wrongful dishonor such as the bounced check fee and expenses incurred defending prosecution for writing hot checks.
Drawee Bank's Defenses for wrongful dishonor:
1. Payment would overdraw the drawer's account
2. Check is more than 6 months old
Payment in full check:
A check on which the drawer conspiculusy indicates that cashing the check acts as payment in full of an existing obligation which is unliquidated or subject to a bona fide dispute.
What is the effect of a payment in full check?
The payment in full check operates as an accord and satisfaction if the payee cashes the check.
Exceptions to the payment in full check accord and satisfaction:
1. Payee returns the money within 90 days
2. Payee is an organizaiton and had previously notified the dreawer of a particular person or address to send payment in full checks.
Forged Drawer's Signature
Alleged drawer:
Is not liable
Forged Drawer's Signature
Drawee bank must:
Recredit alleged drawer's account as check was not properly payable unless drawee bank has a defense
Is Bank able to pass on loss?
No unless breach of presentment warranty
Bank's defenses to recrediting forged drawer's account:
1. Drawer's negligence
2. Bank Statement Rule-duty to inspect statement
Bank Statement Rule-duty to inspect statement:
Customer has duty to inspect bank statement and canceled checks in a timely manner. If customer does not and bank can prove a loss beyond original mistaken payment, customer precluded.

In any case, forged drawer's signatures must be reported to bank within 1 year regardless of bank's or customer's negligence.
Repeat Offender Rule:
If the same person is forging a series of checks, the drawer must report hte forgeries within 30 days of when the statement was available. If the drawer does not do so, the bank will not recredit the account for the subsequent forgeries by the same person.
Imposter Rule:
The issuer, maker, or drawer will be estopped from denying the validity of the forged instrument. The maker or drawer is deemed to have acted carelessly in issueing the check and thus to have contributed to the forgery.
Fraudulent indorsements by employees-payees:
If an employer entrusts an employee (or independant contracter) with responsibility with respect to an instrument and the employee make a fraudulent indorsement, the indorsement is effective. Payee is estopped to assert the forgery.
Transfer Warranties:
Basically a warranty of holder status